life sciences consultant and president of G-Med Consulting
Opinion
The biomedical industry is one of the fastest growing sectors in China. Driven by the increasing demand from an aging population, emerging middle class, the improving living standards, and the government’s continuous investment; the industry has enjoyed unprecedented growth during the past few decades.
The market need is strong for both high-end and low-end products, as the result of unparalleled regional economic development and the income gap between the rich and poor. The high-end market is mainly dominated by some multinational companies, whereas the low-end market is mainly shared by the local suppliers. More local companies are moving into the mid or high-end market. However, most local companies are still on a small or medium scale, with very few innovative products or technologies and limited R&D capability. Many of them have established competitive distribution systems and regional networks, which are crucial in the Chinese market. Now, due to the increasing pressure of tougher regulatory challenges, pricing policy and market competition, local companies are having to add new products and upgrade their quality standards (e.g. new version of GMP). Many of them are actively looking for products and partners to collaborate with from outside China.
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| Vídeo Challenges, opportunities and landing in the Chinese market by Gao Ronghui | Interview to Gao Ronghui, life sciences consultant |
China is quickly becoming the second largest market in the world. The speed of the growth is not expected to slow down in the coming five years. Most of the local pharmaceutical companies are focusing on the low or mid-end generic segment. Some leading players are moving into the high-end generic and biosimilar segments, receiving some strong support from the government and venture capital investment. However, it is still a challenge for them to compete against the major players both on quality and productivity. They are actively seeking new technology and partners from the west to overcome these challenges.
As far as the R&D is concerned, the development has been mainly led by returnees, meaning Chinese scientists with a number of years of study and work experience in the life science industry, in the US or Europe, relocating back to China. They are the major force, both in the leading companies and small R&D companies. After a decade of development, some major CRO companies have been well established. They are becoming the major force to form the R&D base. Stimulated by some MNC’s investment on their R&D centers, a number of R&D focused local companies are emerging. Some of them have developed long-term partnerships with some MNC’s R&D centers and local leaders.
Similar to the pharmaceutical industry, the medical device market has been also growing very fast. But the market is very much fragmented. Local companies mainly target the low-end segment, whereas international players take the majority of the mid and high-end segment. Most local players make me too products and compete on price. Very few companies have the capability to develop innovative products. However, this situation has been changing during the past few years, due to strong market demand and more investment from the venture capital firms. Some market leaders are aggressively entering new sectors or adding new products through acquisition and licensing, which has created a lot of potential to collaborate with companies in Europe.
In the vaccine sector, the Chinese government has encouraged companies to work on a list of projects on some major infectious diseases such as the flu, hepatitis, HIV, TB and malaria, as well as some therapeutic vaccines on cancer and self-immune diseases during its 12th five year plan. There are currently 36 local vaccine companies which produce 27 traditional vaccine products. The central government has allocated over 1 billion euros on new products and new engineering technology development. Many local vaccine suppliers need to upgrade their manufacturing facilities.
The diagnostic sector is another fast growing area, with continuous double digit growth over the past ten years. The current market size is nearly 3 billion euros and the market is fragmented. The two fastest growing sectors are clinical chemistry and immuno- diagnostic, both of which take nearly 50% of the total market.
Stem cell development has received a lot of attention, both from the government and investors. A number of companies have worked with hospitals to conduct research or even provide clinical practice without any regulatory approval. Currently the Chinese regulatory body, SFDA, is trying to strictly regulate any clinical practice. However, the overall market is still growing very fast.
As for the healthcare system, the Chinese government has clearly rolled out its focus on medical reform, to increase coverage of the population. The system is shifting from the current general care system to a tertiary care system. This change has created strong medical demand for basic needs on diagnostic and therapeutic medical devices in the community hospitals.
The major disease areas are more or less linked to the life style and environment in China. Fast food, sweet drinks, environmental pollution and lack of physical exercise are the main causes of some major diseases, such as diabetes (90 million people), hypertension (160 million people), children’s obesity, cancer (3.2 million new patients each year), lung cancer with the highest morbidity and mortality, hardly surprising as China accounts for 20% of the global tobacco market made worse by the serious pollution.
There are many opportunities in more out-of-the-way areas. On one hand the competition in the first tier cities and some of the second tier cities is intensive The leading hospitals in Beijing, Shanghai, Shenzhen or Guangzhou are commonly equipped with the most advanced medical equipment and distribute most well-known brands of pharmaceutical products: on the other hand, the reach to the third or fourth tier cities or rural areas is still loose. There is a lot of room to develop the medical needs in those areas. Most consumers in China have the perception that branded drugs are safer and work better. If they can afford it they are willing to pay a higher price for these products.
The resources in the biomedical industry between China and Europe are complimentary. Europe is strong on innovation and quality but the cost is relatively high and companies need bigger markets for commercialization, whereas China is just the opposite. I have been working on a number of projects to facilitate partnership for companies from both sides.
But before you decide to tap into the Chinese market you must carefully evaluate, your product portfolio, business model, intellectual property, competitive analysis and pricing. It is also absolutely crucial to team up with a good local partner.
From the cultural side, Chinese people very much value personal relationships and flexibility. Once trust has been established, it is much easier to work with them. However, it does take time and patience to nurture this mutual relationship. Some people have interestingly summarized the Chinese culture in three letters, PRC (also the abbreviation for the People’s Republic of China): P for patience (if you go to China to do business, be patient); R, for relationship (have a good relationship with them); and C for cash (they don’t use credit cards often).
If you are a large company, you may consider setting up your own company in China; if you are a small or medium-sized company, you may consider a local partner, or setting up a joint venture (JV) to start with. The local partner may be able to provide some funding, facilities and local scientists; while you can provide the technology or know-how. But you will need to make sure you have the right IP protection strategy in place and to get a reasonable chunk of equity from the company. The distribution system in China is very complicated. You need to identify one or several distributors, if necessary, to distribute your products. It may not be practical to run your own distribution team. Even some MNCs like Johnson & Johnson and Medtronic work closely with their local distributors.
It is noticeable that more Chinese companies are looking for acquisition opportunities in Europe. Many local companies have gone public and have raised a lot of capital from the stock market. They want to acquire some SMEs with good products or technology. There is increasing demand, particularly in the medical device sector. So far a number of clients have interest to acquire some technology or small companies, ranging from 10 million to 100 million US dollar.
Gao Ronghui participated in the workshop "Fostering internationalization (II) China" held by Biocat under the framework of the bioXclusters project on 25 January 2013 in Barcelona.